US Appeals Court Throws Out IRS Rule on Obamacare Subsidies

President Barack Obama's healthcare overhaul suffered a potentially crippling blow as a U.S. appeals court ruled the government cannot give financial assistance to anyone buying coverage on the insurance marketplace run by federal authorities.

The decision, if it withstands appeals, may deprive more than half the people who signed up for Obamacare the tax credits they need to buy a health plan.

The way the Patient Protection and Affordable Care Act is written makes clear that the subsidy is available only to people who bought plans on state-run exchanges, a three-judge panel in Washington ruled Tuesday.

"We reach this conclusion, frankly, with reluctance," District of Columbia Appeals Court Judge Thomas Griffith writes in the 2-1 ruling, which the Obama administration confirmed Tuesday it will appeal. Griffith was joined Judge A. Raymond Randolph.

"At least until states that wish to can set up Exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly," Griffith wrote.

Only 14 states have opted to set up their own marketplaces, making delivery of tax credits via the federal exchange crucial to meeting Obamacare's goal of broadening health-care coverage in the United States.

"A very large share of people need the subsidies," said Robert Blendon, a professor of health policy at the Harvard School of Public Health in Boston. If the ruling isn't overturned, "it basically would significantly cripple the law," Blendon said.

The ruling in the case, called Halbig v. Burwell, is a major blow to the key feature that makes coverage affordable. About 5.4 million people signed up for coverage in the 36 states with a federal exchange. Of those, 87 percent received federal subsidies to purchase insurance, according to the Obama administration.

Those discounts meant those customers are paying about one-fourth of their actual premium, the Department of Health and Human Services reported.

The small-business owners filing the lawsuit say the tax credits enacted by Congress were intended to encourage states to set up their own health benefit exchanges and that the penalty for not doing so was withdrawal of tax credits for lower-income residents.

Supporters of the act say the purpose of the tax credit was not to promote the establishment of state exchanges, but rather to achieve Congress' fundamental purpose of making insurance affordable for all Americans.

The case revolves around four words in the Affordable Care Act, which says the tax credits are available to people who enroll through an exchange "established by the state."

The challengers to the law say a literal reading of that language invalidates the IRS subsidy to people in the federal exchanges. The opponents say that people who would otherwise qualify for the tax credits should be denied that benefit if they buy insurance on a federally facilitated exchange.

"It is implausible to believe that Congress gave the IRS discretion to authorize $150 billion per year in federal spending, particularly when Congress had directly spoken to this issue," the challengers to the IRS subsidy said in a court filing. "Major economic decisions like these — indeed, any decisions granting tax credits — must be made unambiguously by Congress itself."

The Obama administration and congressional and state legislative supporters of the Affordable Care Act say the challengers are failing to consider the words of the statute in its entirety.

"Congress did not provide that the tax credits would only be available to citizens whose states set up their own exchanges," says an appeals court filing by congressional and state legislative supporters of the Affordable Care Act. Congressional lawmakers and state legislators supporting the act said that limiting the subsidies to state exchanges could destabilize important aspects of the law, such as the individual mandate requiring most people to buy insurance.

One consulting firm, Avalere Health, calculated that if the federal subsidies are ultimately banned, it would mean people getting health insurance through the federal exchanges would face an average premium increase of 76 percent in those 36 states.Those states by 2016 will forfeit about $36 billion in federal subsidies to purchase insurance, Avalere figures.

Consumers in Texas and Florida could be hardest hit, according to the report, with $5.6 billion and $4.8 billion, respectively, at risk.

The appeals court's opinion, by Griffith, a George W. Bush appointee, stressed that the IRS rule wasn't a permissible interpretation of the health law. Both judges in the majority were appointed by Republican presidents — Judge Randolph was nominated by President George H.W. Bush.

Judge Harry Edwards, a Jimmy Carter appointee, said in his dissent that the ruling "portends disastrous consequences."

A lower court had ruled that the law's text, structure, purpose, and legislative history make "clear that Congress intended to make premium tax credits available on both state-run and federally-facilitated Exchanges," Edwards wrote.

But the appeals court concluded the opposite — that the letter of the law "unambiguously restricts" the law's subsidies to policies sold through exchanges established by the state.

The government's next step could be an appeal to the entire U.S. Court of Appeals. Seven of that court's 11 judges were nominated by Democratic presidents, including four by Obama.

President Barack Obama's healthcare overhaul suffered a potentially crippling blow as a U.S. appeals court ruled the government cannot give financial assistance to anyone buying coverage on the insurance marketplace run by federal authorities.